You’re a smart lady. You work hard. You make good money. You should be jumping for joy…right?
Instead, when March comes around with tax season nipping at your heels, you dread the letter from your CPA that tells you how much you’re going to owe this year. You worry that you’re not holding on to as much of your hard-earned money as you can and think, “Okay, how much will it be this time?”
If you’re a high-earning woman, you may think you have no choice but to pay an exorbitant amount in taxes.
While it’s true that the more you make the more you’re taxed, it’s also true that a higher income means more ways to potentially offset those numbers.
Today we explore what it means to be a high income earner. We’ll address specific challenges that high-earning women face during tax season, and we’ll outline 6 ways you can reduce your taxes in 2023.
What is a High-Income Earner?
For tax purposes, the IRS defines high-income earners as anybody who earns enough income to be in the top three tax brackets. Consult the chart on the IRS website to find your bracket.
For 2023, you are considered a high-income earner for tax purposes if you earn more than $170,050 as either a single person, a married person filing separately, or a single head of household.
For married filing jointly, high-income means earnings of over $340,101.
What Tax Challenges Do High-Earning Women Face?
From 2014 to 2019, the percentage of full-time working women earning $100,000 or more increased from 8.34% to 12.11%. Over the same time, the percentage of six-figure earners who are women grew from 26.08% to 29.52%. What does this mean?
Well, one thing it means is that women are now paying more in taxes. And as women tend to do things differently with their money than men, that means doing taxes differently, too.
High-earning women want to avoid unnecessary tax consequences and know that they are taking advantage of all applicable credits and deductions but tend to worry about being audited. They may worry about paying more in taxes because of their increasing income or higher bracket. High earners must also be aware of the tax implications of marriage or divorce.
You might think it’s a huge hassle or feel underhanded looking for ways to lessen your tax burden, but it doesn’t have to be that way—there are plenty of simple and effective ways to save on taxes without taxing your own precious time and energy.
6 Ways to Save on Taxes in 2023
With our 6 tax-saving tips below, you can leave your stress behind and gain the confidence and knowledge you need to have your least stressful tax season yet. Let’s get started!
1. Maximize Contributions to Tax-Deductible Retirement Accounts
One of the most common ways for high income earners to save at tax time is to take advantage of the maximum contributions to retirement accounts. These contributions are typically tax deductible, and the money in the account grows tax-free. This means that you can save money on taxes now and save for retirement at the same time. Some of these accounts include:
- Traditional or self-employed IRA
- 401(k) or similar workplace plan
- Health Savings Account (HSA)
According to Forbes Advisor, “An HSA offers a hat trick of tax advantages: Contributions to your account are made pre-tax, lowering your taxable income today; investments grow tax free while they’re kept in the account; and withdrawals are free of income tax, as long as you use the money for qualified medical expenses.”
In effect, the long-term advantages you get with your HSA can be even better than those from an IRA or 401(k) if you use it correctly.
Bonus Tip: If you are 50 years old or older, you can make extra contributions to your workplace plans and IRAs. Starting at age 55, catch-up contributions are also allowed for HSAs.
It is important to remember that the amount of traditional IRA contributions you can deduct will depend on whether or not you have a retirement plan at work.
2. Take Advantage of Tax Deductions and Credits
Another simple way to save at tax time is to capitalize on tax deductions and credits. These are items that can be deducted from your taxable income, which ultimately reduces the amount of taxes you owe. Common deductions and credits include:
- Student loan interest
- Charitable donations
- Property taxes and interest
And even more if you’re self-employed:
- Business expenses
- Health insurance premiums
- Home office expenses
- Small business health insurance credit
- Self-employment health insurance credit
Bonus Tip: If you had significant medical expenses for yourself or a member of your household during the previous year, you can itemize and deduct anything in excess of 7.5% of your adjusted gross income.
3. Take a Look at Tax-Loss Harvesting
High-income earners should definitely consider taking advantage of tax-loss harvesting. This strategy involves selling off investments that have lost money in order to offset any capital gains in other portfolio investments.
Up to $3,000 in losses can be deducted against your regular income. Even better, any unharvested tax losses this year can be carried forward, which can reduce the amount of taxes that you owe in future years.
There are other powerful methods here, but they should be executed by a professional financial planner with experience navigating taxes. Make sure to bring this question to your financial manager.
4. Consider Tax-Free Accounts
Tax-free accounts offer tax advantages to investors by allowing them to earn income or capital gains without paying any taxes on the earnings or growth of the investments in the accounts. The withdrawals are also tax-free. These types of plans are designed to encourage individuals to save or invest by providing incentives.
They can be a useful tool for individuals who want to minimize their tax liability while maximizing returns. Some common examples of tax-free accounts include:
- Roth IRAs: Roth IRAs are individual retirement accounts that allow individuals to contribute after-tax dollars and then withdraw the money tax-free in retirement. This means that any earnings on the account, such as interest or capital gains, are also tax-free.
- 529 college savings plans: 529 college savings plans are investment accounts designed to help individuals save for higher education expenses. Contributions to these plans are typically made with after-tax dollars, but any earnings on the account are tax-free as long as they are used to pay for qualified education expenses.
5. Consider Tax-Advantaged Investments
High-income earners should also consider tax-advantaged investments. These are investments that have favorable tax status. Examples of tax-advantaged investments include:
- Municipal bonds: Municipal bonds are debt securities issued by state and local governments. The interest income earned on these bonds is generally exempt from federal income tax and, in some cases, state and local income tax as well.
- Tax-Exempt Mutual Funds: A tax exempt mutual fund is a type of mutual fund that invests in municipal bonds or other investments that are exempt from federal income taxes. These funds are typically used by investors who are looking to minimize their tax liability while still investing in the stock market.
- Tax-Exempt ETFs: A tax-exempt ETF is an exchange-traded fund that invests in securities that are exempt from federal income taxes. These ETFs are typically composed of municipal bonds and other municipal securities, and they offer investors a way to invest in the municipal bond market without having to pay federal income taxes on their returns.
- Real estate investment trusts: A real estate investment trust (REIT) is a company that owns, operates or finances income-producing real estate. REITs provide investors with regular income streams, diversification and long-term capital appreciation. The income is generated through rents, interest on mortgages and capital gains when properties are sold. REITs are traded on major stock exchanges and are highly liquid.
6. Increase Your Charitable Giving
On average, women donate 6-10% more of their earnings than men of similar demographics.
This means that high-income women can reap even more tax savings with their charitable contributions. According to IRS regulations, cash donations can be deducted up to 60% of the adjusted gross income, while non-cash asset donations are limited to 30%.
There are a few different ways to take advantage of charitable deductions, including:
- Setting up a donor-advised fund
- Making a cash donation directly to an eligible charity
- Establishing a charitable remainder or charitable lead trust
- Donating appreciated non-cash assets to avoid the capital gains tax.
Bonus Tip: If you are over the age of 72 (or 73 in 2023) you can fulfill your Required Minimum Distributions (RMDs) by sending that amount to a charity of your choice. Called a Qualified Charitable Distribution (QCD), the money is sent directly to the charity and you do not have to pay taxes on the distribution.
Individuals aged 70½ or older can donate up to $100,000 annually.
Start Saving More
Sadly, there is no one-size-fits-all approach when it comes to taxes. Having an informed and detailed strategy, however, is the most effective way to keep as much of your hard-earned money as possible.
It’s important for high-net-worth women to develop a comprehensive tax strategy with a firm that is capable of understanding the challenges of high earners. By working alongside your qualified tax advisor, financial planners can further identify ways to reduce your tax liability and maximize long term wealth goals.
Not all of these strategies are relevant to everyone. Consulting with a financial expert is the best way to ensure that you are making the most out of your plan. With the help of a dedicated, woman-focused financial advisor from our team, you can create a strategy that gives you the confidence you need to lead your best financial life.
Better Money Decisions is a 100% female-owned and female-led financial planning firm with the distinct advantage of sharing the feminine perspective.
For guidance on how you can take charge of your financial future and put some of these strategies into play this tax season, use the “Chat Now” feature on this page or simply contact us to schedule a free, no-pressure consultation with one of our advisors today.